Omicron Variant Resurrects the Risk of US Stagflation

Omicron Variant Resurrects the Risk of US Stagflation

Last week’s economic and Covid-related news may well resurrect a risk narrative that makes policy makers and virtually all financial markets particularly anxious: US stagflation, that awful combination of rising inflation and declining growth.

How this risk plays out in the next few months, however, is less than certain, though not because of the inflation component, whose continued upward movement is a near certainty. The bigger question is the growth component, where the underlying private sector drivers, while still solid enough on a stand-alone basis to power through another Covid disruption, could face potentially stronger headwinds because of the mounting risk of a policy mistake and tighter financial conditions in markets.

Coming on the heels of a consumer price index inflation sticker shock of more than 6%, last week’s PCE measure of core inflation, the Federal Reserve’s preferred gauge, came in at 4.1%, a multidecade high. Meanwhile, the growth outlook took several Covid hits, starting with lockdowns in a handful of European countries. This was followed by concerns about B1.1.529, a variant of the Covid virus that the World Health Organization has dubbed Omicron. On Friday, the WHO called Omicron a “variant of concern” because of the higher risk of infection and